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Cotton Spin: So What Will 2015 Bring?

This is meeting season, which means it is the time of the year when lots of cotton market outlook presentations are made. Beginning with Beltwide, I have been listening to and delivering quite a few. The first thing I’ve noticed is that there is not a lot of difference between the bullish, neutral, and bearish views in terms of the price outcome. That is, while there are different opinions about whether the 2015 crop will whittle away at, or add to, ending stocks of cotton, most everybody is projecting cotton prices in a similar, unexciting range (e.g. Dec. 15 futures in the 60s and cash prices in the 50s.

The bullish, neutral, or bearish views of cotton ending stocks have some key differences among them. One key difference is the assumption about U.S. new crop production. While everybody is expecting U.S. planted acreage somewhere less than 10 million, the tighter views assume trend yield and average abandonment. USDA did this in their long term projections (released in December). Based on abundant soil moisture, I find it more likely that the U.S. will see above average yields and below average abandonment. The difference between those views accounts for at least a million-bale difference in new crop production.

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The other key differences in market viewpoint involve consumption. The bullish market view is that lower oil prices will increase world GDP, in turn stimulating more cotton consumption than previously expected. A less macro way of looking at is that lower gasoline prices have put more disposable income in the pockets of consumers. The level of this “cheap gasoline dividend” has been estimated by the U.S. Commerce Department as $700 per year for the average family.

A deeper look at the influence of cheaper energy prices on cotton fundamentals probably raises more questions than answers. Figure 1 shows the relationship between oil prices and world per capita consumption of cotton. Generally, cotton consumption declines during recessions (the tan bars in Figure 1). The graph shows some periods when high oil prices contributed to a global recession (e.g., the early 1980s), which was associated with declining cotton consumption. But the relationship is inconsistent. During the latter 2000s there was an extended period of time when cotton consumption rose along with rising oil prices. This inconsistency is noted in other research studies which conclude that only oil market demand shocks influence cotton prices. Today’s low oil prices appear to be rooted in both a U.S. oversupply and slowing world demand. So the impact on cotton consumption and cotton prices from cheaper oil is uncertain.

One final bullish slant on things is the assertion that the 40 something million-bale Chinese government reserve is of such low quality that China import demand will be higher than currently expected. I think this is another uncertain proposition. First of all, it is China, so nobody really knows. Second, the Chinese government reserve is so large that even if only half, a third or a quarter of it is decent quality, we are talking about tens of millions of bales of decent quality. That is enough to have a price-weakening supply response where Chinese reserve bales are substituted for imported bales.